With proposed tax, they’ll get you coming or going

by Garland M Baker on July 11, 2011

There is a new tax on the horizon for all types of companies, including inactive ones, that could prove to be very expensive for expats living in Costa Rica. This tax is just another way to squeeze everyone, including expats. It will surely prove to be a deterrent to investing in the country.

What is the tax department going to do with all the inactive companies if the new tax on them is passed? An inactive company exists for the sole purpose of holding an asset, but is not engaged in commercial activity. The tax is going to be somewhere between $200 and $300 per company. The exact amount is being debated now in the legislature. It is rumored the tax will probably be $200, but no definite amount is set as yet.

The tax department, Dirección General de Tributación, apparently cannot make up it mind as what to do with inactive companies.

There was a time that these inactive companies received legal books just like active ones. That practice was canceled in 2010 with directive DGT-12-2010. The directive stated that inactive companies should not receive legal books. People complained and legal books were reinstated for these types of companies in June of this year.

There are two components to legal books for a company, minute books referred to as actas,and accounting books. An active sociedad anónima gets three minute books and three accounting books. A sociedad de responsabilidad limitada gets the same number of accounting books but only two for minutes. The difference is that the board of directors book is not required in an S.R.L. and it is omitted.

Expats need to take a hard look at their companies to see if any of them can be closed before the tax on them becomes law. The problem is that it is not all that easy to get rid of them. One cannot just go throw the books in the trash can. Legal professionals questioned about the situation believe that the tax department is going to go after those people that do not pay the tax, and, of course, there will be additional fines and penalties for not paying.

The proper way to close an inactive company is to go before a notary and change the constitution. Most companies are constituted for 99 years. The notary would change the constitution of the company to only a few months into the future. Once past, the company would be in theory dead. The books then should go to the tax department for cancelation.

Sounds easy, but this process is expensive. Here is an estimation of the costs:

A notary will charge around 20,000 colons ($40) for writing the change into the minute book and 60,000 colons ($120) to notarizing the act. To change the constitution of a company requires publication in “La Gaceta,” the official newspaper, which costs between 7,000 and 8,000 colons (up to $16). To file the paperwork costs about 65,000 colons ($130).

Add it all up and the result is 153,000 colons or three hundred and six dollars. A lot of money just to kill and inactive company.

The only alternative is to do nothing and wait to see if tax department tries to collect the money. Which they probably will in time. Now during that time, the tax, interest and penalties will all add up to more than it would have cost to close the company.

Why is the legislature trying to pass this tax? The answer is simple. Many people avoid transfer taxes on real property and other assets like vehicles by just transferring an inactive company that holds the asset.

This is perfectly legal, transferring a company to another owner, but the tax department does not get its share, the transfer taxes. It is envisioned that imposing a yearly tax on inactive companies should curtail some of this activity.

This new tax really puts expats in a dilemma. It is not a very good idea for expats to hold property in their personal name.

There are many reason for stating this but the most important is due to probate. Probate is expensive and time consuming. Judicial probates can last for many years.

It is wise to hold property separate from vehicles and employees which means many expats have at least three companies. This new tax is going to make doing so too expensive for many expats.

An amnesty would be nice, to give people a chance to get rid of old and out-of-date companies. Many expats created companies years ago. Some have forgotten about them, others have no idea where the paperwork is for those entities.

Even though an amnesty seems like the thing to do, it does not look like there will be one. The tax appears imminent for this tax year. It all comes down to money.

The Costa Rican government is trying to close the loophole and collect more transfer taxes. It would be interesting to know if the legislature has considered lost new investments into the country due to imposing a yearly tax on inactive companies.

The final kicker is that this proposed new tax would not be a deductible item on the company’s incomes taxes, according to the draft of the proposed law.

Ticos have been using the idea of "inactive compaies" along with the concept of wrapping up their cars, homes and other assets in shell corporations for a LONG time. The gringos who come here are just following the lead of the rich people who run Costa Rica.

Kill the company? What are the consequences of doing that when it comes time to convey real property to a new owner? Excise tax on the sale? Are you talking about holding title in your own name instead of in the name of a corporation?

Costa Rica Expertise LLC

Garland M. Baker is a naturalized citizen who has resided in Costa Rica since 1972. Lic. Allan Garro is a prestigious Costa Rican attorney and notary. They provide multidisciplinary professional services to the international community, and act as consultants in many cases published here.